CHTR - Charter Communications

[Munger_Disciple]

Did anyone see Mafei kind of criticize Chtr mgmt about "blowing their load at 350" or something like that maybe 6 months ago, do nt remember what transcript.  He was clearly frustrated that Chtr wasnt going to act aggressively and go over 4.5 times when price dropped well under 300.

 

IIRC, Maffei was more frustrated that CHTR management bought back too much stock at higher prices and thus not leaving enough dry powder when the stock dropped to $270. I think he is ok however with leaving the leverage (debt/EBITDA) at approximately 4.5.

[Shooter MacGavin]

Faux Greg Maffei

‏

 

"Hey Tom, it's Greg"

"Hi Greg, let me tell you, our network architecture is incredibly robust and fiber-dense"

"Glad to hear it Tom, but how does your cash available for a buyback look? You didn't spend it all this time, did you?

...

Tom?"

[Spekulatius]

Tom should give these Liberty cable guys in Europe a call too.

[Shooter MacGavin]

Tom should give these Liberty cable guys in Europe a call too.

 

Mike Fries will probably sell him some LBTYK stock bundled with a Virgin Media package. 

 

[Liberty]

Q3: http://ir.charter.com/phoenix.zhtml?c=112298&p=irol-newsArticle&ID=2373694

 

Key highlights:

 

As of September 30, 2018, Charter had 27.9 million total customer relationships and 53.0 million total PSUs.

Third quarter total residential and SMB customer relationships increased 234,000, compared to 215,000 during the third quarter of 2017. Over the twelve months ended September 30, 2018, total residential and SMB customer relationships grew by 3.4%.

Third quarter revenues of $10.9 billion grew 4.2%, as compared to the prior year period, driven by residential revenue growth of 3.3%, commercial revenue growth of 4.3%, and advertising revenue growth of 18.1%.

Third quarter Adjusted EBITDA1 of $4.0 billion grew 3.5% year-over-year, and 5.5% when excluding third quarter mobile revenue and operating expenses.

Net income attributable to Charter shareholders totaled $493 million in the third quarter, compared to $48 million during the same period last year primarily driven by a pension remeasurement gain, Adjusted EBITDA growth and lower depreciation and amortization expenses.

Third quarter capital expenditures totaled $2.1 billion compared to $2.4 billion during the third quarter of 2017, primarily driven by a decline in customer premise equipment spending for Spectrum migration, and lower scalable infrastructure spending given in-year timing differences. Third quarter capital expenditures included $42 million of all-digital costs and $66 million of mobile launch costs.

During the third quarter, Charter purchased approximately 3.5 million shares of Charter Class A common stock and Charter Communications Holdings, LLC ("Charter Holdings") common units for approximately $1.1 billion.

[gfp]

Market seems disappointed. I did notice they are taking price increases across most of their products. At least in my market, but I got the impression it was company-wide.

[scorpioncapital]

Let's see if Maffei can convince the board to actually make some meaningful buybacks at these lower prices.

[Liberty]

Per share FCF and cable EBITDA:

 

2018 Q3 FCF YoY: +26.8%

2018 Q3 EBITDA YoY: +16.6%

[chrispy]

The market response is interesting but I guess CHTR is down today's amount compared to the >10% for the broader market

[maybe4less]

Market seems disappointed. I did notice they are taking price increases across most of their products. At least in my market, but I got the impression it was company-wide.

 

They are always taking price.

[vince]

Per share FCF and cable EBITDA:

 

2018 Q3 FCF YoY: +26.8%

2018 Q3 EBITDA YoY: +16.6%

 

Are you using 5.5% as ur ebitda growth number?  If you look at Chtr's commercial business (high margin, almost 20% of total revenues, and growing units at over 10% every reporting period) it grew units at 12 percent but because their volume strategy is different than acquired footprints they lowered price therefore commercial revs up around 4%.  They have a few more months for this pig to get exit the snakes ass but my numbers show anther 2-2.5%of ebitda growth, or around 8%.  And that doesnt include some other factors that would lift that even more.  I will take those numbers all day long and the stock will do extremely well if 8% is the run rate, which I believe it is.  I believe we will get to low double digits soon and stay there for a couple years and then hover around that 8% for at least a few more years.  Remember, Chtr has much more pricing power than other cable companies (arpu's are lower) and it will eventually get applied to the much larger base that they are building now.

[Liberty]

Per share FCF and cable EBITDA:

 

2018 Q3 FCF YoY: +26.8%

2018 Q3 EBITDA YoY: +16.6%

 

Are you using 5.5% as ur ebitda growth number?  If you look at Chtr's commercial business (high margin, almost 20% of total revenues, and growing units at over 10% every reporting period) it grew units at 12 percent but because their volume strategy is different than acquired footprints they lowered price therefore commercial revs up around 4%.  They have a few more months for this pig to get exit the snakes ass but my numbers show anther 2-2.5%of ebitda growth, or around 8%.  And that doesnt include some other factors that would lift that even more.  I will take those numbers all day long and the stock will do extremely well if 8% is the run rate, which I believe it is.  I believe we will get to low double digits soon and stay there for a couple years and then hover around that 8% for at least a few more years.  Remember, Chtr has much more pricing power than other cable companies (arpu's are lower) and it will eventually get applied to the much larger base that they are building now.

 

I just used the raw numbers each year (cable EBITDA this year so it's comparable to last year, before the mobile spend) and divided by the shares outstanding. Did I screw up the math?

[vince]

Per share FCF and cable EBITDA:

 

2018 Q3 FCF YoY: +26.8%

2018 Q3 EBITDA YoY: +16.6%

 

Are you using 5.5% as ur ebitda growth number?  If you look at Chtr's commercial business (high margin, almost 20% of total revenues, and growing units at over 10% every reporting period) it grew units at 12 percent but because their volume strategy is different than acquired footprints they lowered price therefore commercial revs up around 4%.  They have a few more months for this pig to get exit the snakes ass but my numbers show anther 2-2.5%of ebitda growth, or around 8%.  And that doesnt include some other factors that would lift that even more.  I will take those numbers all day long and the stock will do extremely well if 8% is the run rate, which I believe it is.  I believe we will get to low double digits soon and stay there for a couple years and then hover around that 8% for at least a few more years.  Remember, Chtr has much more pricing power than other cable companies (arpu's are lower) and it will eventually get applied to the much larger base that they are building now.

 

I just used the raw numbers each year (cable EBITDA this year so it's comparable to last year, before the mobile spend) and divided by the shares outstanding. Did I screw up the math?

 

I dont know, I was surprised at the rates but should be close cause of all the shares bought back.  My point was that anyone seriously looking at charter should absolutely make the additional adjustment that I did (the 5.5% adjusted number that mgmt put out excludes the mobile spend like u) to get a cleaner picture of their rev and ebitda growth rate.  They didnt just apply that lower rate to new customers, they applied it to all existing acquired customers which is masking their numbers as they continue to grow quite rapidly.  Most people talk about their high margin residential fixed broadband but that incremental commercial revenue growth (I estimate that revenue at 65-70% ebitda margin) is extremely important if you start talking about a 500-600$ stock price and a nice cushion if problems start to show up elsewhere.  Cooperation amongst cable companies gives them a national footprint which is a clear advantage especially in the enterprise (large business) revenues which gives me confidence that their commercial business growth will continue at a good clip. 

[vince]

Also interesting that Comcast had 8% ebitda growth this qtr.  They dont have the same margin expansion opportunity as Charter does but it turns out they have other margin enhancing stuff in the pipeline.  This is very good news for chtr investors because it shows that as charter matures thru this acquisition phase they will have other levers going forward and still have that pricing gap in their back pocket if they need it.  I urge anyone interested in chtr to follow comcast very closely to get an idea of what chtr will look like down the road and the picture is beautiful indeed....especially at 70-80 billion market cap.  Just look at the margin and capex performance at comcast (isolate the cable business obviously) and importantly the likely continuation of it

[Spekulatius]

Also interesting that Comcast had 8% ebitda growth this qtr.  They dont have the same margin expansion opportunity as Charter does but it turns out they have other margin enhancing stuff in the pipeline.  This is very good news for chtr investors because it shows that as charter matures thru this acquisition phase they will have other levers going forward and still have that pricing gap in their back pocket if they need it.  I urge anyone interested in chtr to follow comcast very closely to get an idea of what chtr will look like down the road and the picture is beautiful indeed....especially at 70-80 billion market cap.  Just look at the margin and capex performance at comcast (isolate the cable business obviously) and importantly the likely continuation of it

 

I like CMCSA and their results better. Lower leverage also means higher financial flexibility, although their SKY deal will increase leverage to close to 3x EBITDA, which is still much lower than CHTR ~5x.

CHTR EBITDA growth of 3-4% isn’t that great when the fairly substantial interest expenses grow ~12% YOY

[vince]

Also interesting that Comcast had 8% ebitda growth this qtr.  They dont have the same margin expansion opportunity as Charter does but it turns out they have other margin enhancing stuff in the pipeline.  This is very good news for chtr investors because it shows that as charter matures thru this acquisition phase they will have other levers going forward and still have that pricing gap in their back pocket if they need it.  I urge anyone interested in chtr to follow comcast very closely to get an idea of what chtr will look like down the road and the picture is beautiful indeed....especially at 70-80 billion market cap.  Just look at the margin and capex performance at comcast (isolate the cable business obviously) and importantly the likely continuation of it

 

I like CMCSA and their results better. Lower leverage also means higher financial flexibility, although their SKY deal will increase leverage to close to 3x EBITDA, which is still much lower than CHTR ~5x.

CHTR EBITDA growth of 3-4% isn’t that great when the fairly substantial interest expenses grow ~12% YOY

 

Spek, you gotta get ur facts right to gain credibility.  Comcast is at 3.5 times pro forma, not 3 and Charter is at 4.47, not 5.  In addition, that ebitda growth that u print includes their recently started mobile launch so 5.5 is probably the number to use and in ur case, because you like comcast, it makes even more sense to use the 5.5 because comcast excludes mobile as well (I am almost positive that their adj ebitda does exclude).  I dont necessarily disagree with your premise. Cmcsa has a wonderful business and yes more debt reduces flexibility and increases risk but I think there is a very good probability that Chtr will outperform Cmcsa going forward and if you look closely they may be outperforming them on most measures now and if you conservatively normalize for the integration, Chtr is hands down spanking them.  One more point....Comcast may have a more speculative flavor now that they need to get some really good performance out of sky to justify the purchase premium and 3.5 debt is not especially conservative anymore.  Combined with the fact that their footprint is much  more exposed to the more obvious competitive threats, their flexibility may be illusory.

[Spekulatius]

Vince, you numbers are correct and mine were wrong. I don’t really particularly like the SKY acquisition, but CMCSA have proven to be good operators and there were plenty of sceptics too when they bought NBC. They clearly want one a content/ cable hybrid, while CHTR remains a pure delivery play. I have scaled back my CHTR position a bit about a week ago for risk management purposes, but if it stays around $290/ share, I probably buy back what I sold.

[vince]

Vince, you numbers are correct and most new wrong. I don’t really particularly like the SKY acquisition, but CMCSA have proven to be good operators and there were plenty of sceptics too when they bought NBC. They clearly want one a content/ cable hybrid, while CHTR remains a pure delivery play. I have scaled back my CHTR position a bit about a week ago for risk management purposes, but if it stays around $290/ share, I probably buy back what I sold.

 

Yes they are fantastic operators and allocators and will do at least reasonably well with the acquisition.  I dont understand exactly what you said in ur first sentence, please clarify.

[vince]

To put it simply, over next 5-7 years Comcast will be better and safer for a solid 12-13 pecent compounded return from these prices whereas Charter has a better shot at getting you a 16-18 percent return, again from these prices and with a somewhat riskier business model.  This is just an opinion and obviously open to be questioned and picked apart so be nice whoever wants to respond

[Spekulatius]

Vince, you numbers are correct and most new wrong. I don’t really particularly like the SKY acquisition, but CMCSA have proven to be good operators and there were plenty of sceptics too when they bought NBC. They clearly want one a content/ cable hybrid, while CHTR remains a pure delivery play. I have scaled back my CHTR position a bit about a week ago for risk management purposes, but if it stays around $290/ share, I probably buy back what I sold.

 

Yes they are fantastic operators and allocators and will do at least reasonably well with the acquisition.  I dont understand exactly what you said in ur first sentence, please clarify.

 

Spelling correction got me. My numbers were wrong. I think I mixed up CHTR debt ratio with LBTYA’s.

[vince]

For those interested I just tried a fairly simple cash flow normalization excercise on Chtr using isolated Cmcsa cable numbers.  Keep in mind that comcast monthly arpu is 30 dollars more than chtr and charter has more interest expense and less taxes and I dont know how much debt to allocate to comcast cable.  That 30 of monthly arpu adds 10 billion of revenue to chtr or roughly 4 billion of ebitda.  After playing with the numbers a bit and ignoring what looks like some significant margin opportunities in the pipe and lower capex as a percentage of revenue likely and also ignoring the 5G threat or opportunity and ignoring wireless I get 7.5 billion fully taxed equity fcf with current leverage ratios.  During this excercise I noticed cmcsa has a metric called cable net cash flow and it equaled 13 billion before tax and interest.  Interestingly, this brings me right back to 7.5 billion fcf give or take.  A few notables....rather than someome challenging the 3 free points of margin I gave to Chtr, it looks like all else equal that chtr's margins would be even higher than 40% if we had 2.25 million more customer relationships (charter actually has better cust rel ratio to homes passed) and 153 dollars of monthly rev per customer relationship (those are both cmcsa numbers).  Remember also that altice has already lifted their margins to the 44% range (obviously we dont know if thats sustainable yet) which is putting pressure on the larger cable cos considering thats not even an apples to apples comparison because of programming cost advantages.  Anyway, those are some of the numbers people will probably need to estimate charters earning power, (be careful not to add 3 points of margin AND the profit that drops to margin from 30 dollars of monthly arpu on 28 million relationships) looks like they are trading at 10 times fcf with some very interesting opportunities  going forward and some unique risks as well.  I dont think its a stretch at all to model 53 billion in revenue and 40% margins, with 14% capex ending 2021.  Isnt that like 5 times ebit on todays price?  And I could be wrong but I strongly believe that industry margins are climbing towards 45% or higher.  Atus's model is very important for cable watchers.

[walkie518]

For those interested I just tried a fairly simple cash flow normalization excercise on Chtr using isolated Cmcsa cable numbers.  Keep in mind that comcast monthly arpu is 30 dollars more than chtr and charter has more interest expense and less taxes and I dont know how much debt to allocate to comcast cable.  That 30 of monthly arpu adds 10 billion of revenue to chtr or roughly 4 billion of ebitda.  After playing with the numbers a bit and ignoring what looks like some significant margin opportunities in the pipe and lower capex as a percentage of revenue likely and also ignoring the 5G threat or opportunity and ignoring wireless I get 7.5 billion fully taxed equity fcf with current leverage ratios.  During this excercise I noticed cmcsa has a metric called cable net cash flow and it equaled 13 billion before tax and interest.  Interestingly, this brings me right back to 7.5 billion fcf give or take.  A few notables....rather than someome challenging the 3 free points of margin I gave to Chtr, it looks like all else equal that chtr's margins would be even higher than 40% if we had 2.25 million more customer relationships (charter actually has better cust rel ratio to homes passed) and 153 dollars of monthly rev per customer relationship (those are both cmcsa numbers).  Remember also that altice has already lifted their margins to the 44% range (obviously we dont know if thats sustainable yet) which is putting pressure on the larger cable cos considering thats not even an apples to apples comparison because of programming cost advantages.  Anyway, those are some of the numbers people will probably need to estimate charters earning power, (be careful not to add 3 points of margin AND the profit that drops to margin from 30 dollars of monthly arpu on 28 million relationships) looks like they are trading at 10 times fcf with some very interesting opportunities  going forward and some unique risks as well.  I dont think its a stretch at all to model 53 billion in revenue and 40% margins, with 14% capex ending 2021.  Isnt that like 5 times ebit on todays price?  And I could be wrong but I strongly believe that industry margins are climbing towards 45% or higher.  Atus's model is very important for cable watchers.

agreed

 

market doesn't like the leverage, however, and the threat of rising rates?  we see this across the Malone empire, where all of his assets carry a fair amount of leverage (albeit at cheap rates)...my guess is that if the coverage doesn't hit the right numbers, however, CHTR et al start to pay down some debt as it matures so that costs and spread remain somewhat consistent.  In this way, as CHTR increases margins over time, debt might come down over time as well...

 

you point to Altice's margins...I think it's unlikely we see continuation of that figure, and it's more likely they juiced when the split occurred for purpose of appeasing the bankers and getting top dollar?

[Liberty]

market doesn't like the leverage, however, and the threat of rising rates?  we see this across the Malone empire, where all of his assets carry a fair amount of leverage (albeit at cheap rates)...my guess is that if the coverage doesn't hit the right numbers, however, CHTR et al start to pay down some debt as it matures so that costs and spread remain somewhat consistent.  In this way, as CHTR increases margins over time, debt might come down over time as well...

 

I think they'll keep buying back stock rather than pay down debt if it remains depressed and interest rates don't massively spike.

 

Malone ran pretty levered back when interest rates were much higher than today and still created tons of value. I think that as long as interest rates rise because real rates are rising (ie. the economy is doing better), there's not much danger on that front.

[vince]

market doesn't like the leverage, however, and the threat of rising rates?  we see this across the Malone empire, where all of his assets carry a fair amount of leverage (albeit at cheap rates)...my guess is that if the coverage doesn't hit the right numbers, however, CHTR et al start to pay down some debt as it matures so that costs and spread remain somewhat consistent.  In this way, as CHTR increases margins over time, debt might come down over time as well...

 

I think they'll keep buying back stock rather than pay down debt if it remains depressed and interest rates don't massively spike.

 

Malone ran pretty levered back when interest rates were much higher than today and still created tons of value. I think that as long as interest rates rise because real rates are rising (ie. the economy is doing better), there's not much danger on that front.

I think you are absolutely right that the market doesnt like the leverage and all things equal it is more risky.  However, this is the type of business that can handle aggressive debt.  Also its fixed at low rates for long periods.  And if you are gonna have lots of debt anyway then we have the right guys to monitor it.  Mallone is famous for saying if your cash flow growth rate is higher than your cost of debt value is infinite.  There is no doubt that a certain amount of debt maximizes value although it makes me a little uncomfortable too. 

 

  Never really thought about Atus margins being juiced but they are just the coalmine canaries.  There is strong indications that the cable industry can use technology to lower their opex and capex (you gotta read comcast conference calls, they are more mature and not going thru any integrations like atus and chtr, very very informative, most people dont realize how much you can count on comcast numbers as ur eventual numbers assuming you have good mgmt)  In addition, fixed broadband and their commercial business have better margins and those 2 are growing and becoming a larger piece of the pie as video shrinks.  Very confident that 45% is coming with time but Atus is being kindly generous in showing us whether that is true and maybe showing us that even better margins are coming eventually. If they fail, we buy them, if they succeed they buy us and at a better price because of that fact.  I agree with Liberty, they will probably not pay down debt

[Munger_Disciple]

Malone is famous for saying if your cash flow growth rate is higher than your cost of debt value is infinite.

 

Malone was quoted as saying this in the book Cable Cowboy. I am trying to understand what he meant by this. If you take on debt to buy a new cable business or add an additional service like mobile to your current users, as long as your increase in cash flow exceeds your extra debt payment, you are adding equity value to shareholders. Naturally you can repeat this process almost forever if you started out small like TCI did, and thus the word "infinite". Is this correct?